One of the best ways to increase your investment portfolio is to invest in real estate. Real estate is a tangible asset that allows you to physically touch and see your investment, a trait that attracts many people to real estate investment. Unfortunately, most people don’t have enough cash lying around to invest in real estate, especially commercial real estate. However, if you gather several individuals who are looking to invest and you pool their money, eventually you’ll have a small group of investors who can afford to invest in commercial real estate on the large scale. This is precisely what REITs — or Real Estate Investment Trusts — allow you to do. They let you reap all of the benefits of real estate investment without being bogged down by the daily mundanities of being a landlord.
REITs were created by federal law in 1960, and have gained ever increasing popularity as people look for higher returns on their investments. Real estate investments generally at least maintain their value if not increase in value. These companies are required to distribute 90% of their income to their shareholders, and have a 20-year average annual return of 11.8%. There are both publicly and privately traded REITs, although research shows that publicly traded REITs tend to offer more transparency, quicker bounce back from downturns, and better long-term results than privately traded ones.
Once you’ve chosen to invest in REITs, you have another choice to make: in which of the 5 types of REITs would you like to invest?
Retail REITs. Retail REITs are the biggest investment by type in America, and comprise 24% of REIT investments through retail stores and shopping malls. It’s important to remember that any retail REIT makes its money from the rent paid by its tenants. If your retailers experience poor sales, they could end up delaying their payments or defaulting on them altogether, forcing them into bankruptcy and forcing you to find a new tenant.
- Residential REITs. Residential REITs typically own multi-family apartment buildings and other housing units. It’s best to look for places with a falling vacancy rate and a rising rent rate, as these are signs of increased demand.
- Healthcare REITs. Included in Healthcare REIT investments are medical centers, hospitals, nursing homes, and retirement communities. Look for a diverse group of customers as well different property types in which to invest.
- Office REITs. These typically deal with long-term leases as they are for office spaces, and require you to ask yourself several questions before investing: What are the vacancy rates? How high is the unemployment rate? What is the state of the economy? Office REITs want places in stable economic environments.
- Mortgage REITs. Differing from all other types of REITs, Mortgage REITs deal with investments in mortgages rather than in real estate itself. They purchase mortgage debts on the secondary mortgage market, focusing on those backed by federal agencies like Fannie Mae or Freddie Mac.
Although the return on REITs is definitely enticing, it’s important to keep your investments diverse; REITs should make up only 5%-10% of your portfolio, and should be spread across several types of real estate.